U.S. appeals court backs SEC's use of in-house trials

WASHINGTON (Reuters) - A U.S. appeals court on Tuesday rejected a request by an investment manager to have his in-house trial before a Securities and Exchange Commission judge tossed out, handing the U.S. regulator a major victory.

Tuesday’s ruling stems from a legal battle between the SEC and George Jarkesy, Jr., a hedge fund manager sued by the SEC in 2013 over allegations of fraud.

An SEC judge found him liable in the case, and he appealed the decision to the agency.

Jarkesy sought to have the case terminated in a federal district court, arguing that the SEC’s home court infringed upon his Constitutional rights, among other things.

The district court denied Jarkesy’s request, saying it lacked authority to review the case and that he needed to follow the proper appeals process laid out in existing securities laws before he could seek judicial review.

The U.S. Court of Appeals for the District of Columbia affirmed that decision on Tuesday, saying it was dismissing his case “for lack of subject matter jurisdiction.”

“Jarkesy must continue to press his various challenges to the commission’s enforcement proceeding before the commission itself,” the court wrote in a unanimous decision.

“Should the agency’s final order be adverse to him, Jarkesy can then raise his challenges in a petition for review to a court of appeals.”

S. Michael McColloch, an attorney for Jarkesy, said he respectfully disagrees with the court’s decision, and he is confident his client will be exonerated.

“We intend to vigorously pursue these issues through the courts until these important constitutional questions are resolved,” he said.

Jarkesy is one of several defendants who have increasingly sought to challenge the SEC’s use of in-house trials.

The agency won new powers from Congress in 2010 to seek penalties against a wider array of defendants through in-house trials, making the venue more appealing.

Defense lawyers have argued that the venue affords their clients fewer protections, and they say the appeals process is flawed because defendants must first appeal rulings before the full five-member commission before they can seek review before a U.S. appeals court.

This marks the second time that a U.S. appeals court has backed the SEC on its use of in-house trials.

In August, the 7th U.S. Circuit Court of Appeals issued a similar ruling in a case involving Laurie Bebo, a former chief executive of Assisted Living Concepts.

Cases involving challenges to the SEC’s home courts are pending in New York and Georgia.